Why does the investment rate not increase? Capital accumulation and stabilization policy in the 1990s and 2000s in Brazil

ABSTRACT

The stabilization of inflation was conquered in the mid-1990s, but since then the Brazilian economy has not shown a stable growth trend. This article discusses how the maintenance of a high interest rate in Brazil has affected growth through its impact on investment decision. In a macroeconomic environment with a relatively high degree of uncertainty, decisions to accumulate capital rely heavily on retained earnings and are negatively affected by the persistent high level of interest rates. Our econometric exercise reveals that the interest rate is the most important variable to explain the investment rate, and that financialization negatively impacts physical capital accumulation.

KEYWORDS:

• Brazilian economy
• capital accumulation
• economic growth

JEL CLASSIFICATIONS:

• E22
• E12

Notes

¹According to the author, the principal impacts of financialization are: (1) it elevates the significance of the financial sector relative to the real sector, (2) it transfers income from the real sector to the financial sector, and (3) it increases income inequality and contributes to wage stagnation. In addition, there are reasons to believe that financialization can put the economy at risk of debt deflation and prolonged recession.

²This means that for firms to be able to obtain receipts that will allow them to validate their debts and to earn the profits they expected, they must be able to anticipate the right volume and structure of aggregate demand to be generated. We consider, with Keynes and Kalecki, that consumption expenditures are induced by income. In a closed economy without government, aggregate profits depend on investment. If investments are not realized, not only do some firms experience losses but also, through financial linkages, suppliers of funds are hurt.

³For an emerging economy without convertible currency, one should also consider the importance of the real exchange rate in affecting investment decisions. The role of the real exchange rate in recent development of the Brazilian economy has been emphasized by the “new” developmental economists (see, e.g., Bresser-Pereira et al. 2015).

⁴In other words, it is the profit rate that adjusts to the interest rate.

⁵Chick (1987) argues that in order to deepen the understanding of the role of the interest rate on capital accumulation in Keynes, one should take into account the role of the speculative demand for money.

⁶Kalecki’s theory of increasing risk is close to Minsky’s concept of borrower’s risk. According to Minsky, a decision to invest always implies a decision about a liability structure. So the firm in order to accomplish its investment plans should combine internal and external financial resources. This combination depends on the firm’s perception about the risk of borrowing, which is subjective, on the one hand, and the lender’s risk, which is contractually established, on the other.

⁷This is the basic reasoning of Minsky’s financial positions describing how payment on debts and receipts of income must occur to maintain the firm’s smooth functioning (Minsky, 1986).

⁸Debt financing of investment in physical capital implies the payment of interest by productive firms, that is, part of the firm’s cash flow is appropriated by financial capitalists. Therefore, for a given increase in interest payments, investment in fixed capital decreases, while revenue from financial firms increases. This is an important issue because, according to Oreiro (2013, p. 52), an increase in interest income will result, in Kaleckian terms, in a reduction in the share of profits appropriated by the capitalist in the productive sector. If this occurs, financialization—the increase in the percentage of income earned by financial firms—could generate conflicts among capitalists in spite of the conflict between capital and labor.

⁹For a discussion of financial patterns in Brazil, see Feijó et al. (2014).

¹⁰For a brief financial history of the American postwar economy, see Wray (2011).

¹¹It should be remarked that this reasoning is in accordance with Keynes’s theory of investment as a portfolio choice (Keynes, 1936, ch. 17). The literature on financialization emphasizes how this choice is enhanced in the environment of a deregulated financial sector. For a recent discussion of specific forms of financialization in the past few decades, which views financialization as a stage of capitalism dating from the 1980s, see Sawyer (2013–14).

¹²See Correa et al. (2012–13) for an interesting discussion of the negative consequences of financialization to the growth perspectives of the Mexican economy.

¹³In fact the authors argue that the financialization process greatly increases the fragility of the economic system because the insufficient regulation of the financial market, the increase in income inequality, and the deepening of current account imbalances on a global scale are elements that taken together lead to an increase in liquidity preference, which consequently decreases the supply of funds to debt finance those in need. On this topic, Lavoie (2012–13), for instance, states that growth in a finance-dominated regime is not sustainable because it depends on an increasing ratio of debt to income.

¹⁴For individual firms the generation of profits on physical investment is a necessary condition to keeping the value of assets balanced with that of liabilities.

¹⁵So far we have made a distinction between financial and nonfinancial firms in regard to profit share. We should also mention the conflict between profit and wages. Capital accumulation in physical assets should increase labor productivity, and to the extent that this gain is appropriated by wage earners, the share of wage and profit in total income should not change. But if productivity gains are not incorporated totally or partially by wage earners, than there will be a tendency toward the concentration of wealth in the hands of capitalists.

¹⁶This occurred with the Cruzado Plan (February 1986), Bresser Plan (July 1987), Summer Plan (January 1989), and Collor Plan (March 1990).

¹⁷The investment rate was 21.4 percent in the 1970s, 22.2 percent in the 1980s, 17.9 percent in the 1990s, and 16.8 percent in the 2000s.

¹⁸For a discussion of the pricing behavior of industrial firms in the 1990s, see Feijó and Cerqueira (2013).

¹⁹Current account deficits as a percentage of GDP moved from −0.33 percent in 1994 to −4.19 percent in 2001 and to −1.51 in 2002. Only in 2003 did the current balance present a small surplus following the beginning of the commodities boom.

²⁰As Serrano and Summa (2011, p. 27) point out, even when external constraints were relaxed in the mid-2000s, “Brazilian authorities were a bit slow in realizing this and beginning to take advantage of the considerable policy space that was opened.” They conclude that although the economic policy did not change the economy showed better performance due to the boom of exports, which was interrupted after the international financial crisis.

²¹See, for instance, Paula et al. (2015) and Ferrari-Filho et al. (2014) for a discussion of the Brazilian policy space in confronting the 2008 and the 2010 international crises.

²²After 2008, the process of reducing the share of public banks in the financial sector was reversed.

²³See Moreira and Puga (2001), for instance, for data for the end of the 1990s.

²⁴It should be mentioned that large companies and those working in specific sectors can get finance through public investment banks, allowing them to carry out investment projects using long-term debt finance supplied by public development banks. But assuming that most non financial firms in Brazil do not have access to public or foreign funds the accumulation process of most Brazilian firms takes place via retained earnings.

²⁵According to the Penn World Table statistics, from 1990–2011, the average rate of investment was 18.1 percent in Brazil; 20.8 percent in Russia, 22.6 percent in India; 33.3 percent in China, and 20.1 percent in South Africa.

²⁶According to Ocampo and Vos (2008), the neoliberal agenda of economic policy, as the one followed by the Brazilian economy after stabilization, reduces policy space in developing economies, since their growth cycles are determined by the external environment, and little room is left for contra-cyclical measures.

²⁷Bresser-Pereira and Nakano (2002, p. 169) state that, “After the persistent maintenance of interest rates at very high level, it is natural that there is a fear of reduction and so that level becomes a convention in the Keynesian sense of the term, and also a trap. Therefore, there will not be easy to escape the perverse equilibrium of the interest rate that we got ourselves into many years ago.”See also Carvalho (2005, p. 326), where the author reinforces Bresser-Pereira and Nakano’s view on why the level of the interest rate in Brazil is chronically high.

²⁸The share of savings from financial firms to total domestic savings has increased from 8.9 percent in 2000 to 17.0 percent in 2009, according to the National Accounts.

²⁹Estimates on investment function for the Brazilian economy can be found in Luporini and Alves (2010), Oreiro et al. (2014), and Santos et al. (2015), among others. For estimates considering Brazil and other economies, see, for instance, Pelicioni and Resende (2009).

³⁰The description of sources for the estimated variables are in the Appendix.

³¹As an illustration, for the developing Latin American and Caribbean economies, during the 2003–14 period, gross capital formation as a percentage of GDP was 20.4 percent on average, and the Brazilian rate was 19.7 percent. World Development Indicators (available at http://data.worldbank.org/data-catalog/world-development-indicators; accessed December 14, 2015).

Additional information

Notes on contributors

Carmem Feijó

Carmem Feijó, Marcos Tostes Lamônica, and Julio Cesar Albuquerque Bastos are affiliated with the Department of Economics, Fluminense Federal University, Rio de Janeiro, Brazil.

Marcos Tostes Lamônica

Carmem Feijó, Marcos Tostes Lamônica, and Julio Cesar Albuquerque Bastos are affiliated with the Department of Economics, Fluminense Federal University, Rio de Janeiro, Brazil.

Julio Cesar Albuquerque Bastos

Carmem Feijó, Marcos Tostes Lamônica, and Julio Cesar Albuquerque Bastos are affiliated with the Department of Economics, Fluminense Federal University, Rio de Janeiro, Brazil.